Hello Everyone,
I have been looking for valuation methods and came across this question;
Suppose we have two pieces of lands; L1 and L2. In L1 if you invest Rs 500 at the beginning of the year you will earn Rs 50 as profit by the end of the year. Similarly, if you invest Rs 500 in L2 at the beginning of the year you will earn Rs 100 as profit by the end of the year. What price should you pay for land L1 and L2. Assume the required rate of return as 10%.
Kindly give your insights on how we can value these pieces of land.
clearly you would prefer buying L2 as its giving 20% return on investment compared to L1.
The best if you would have asked this question in terms of Business 1 and Business 2 and have put out some business characteristics and growth prospects.
Thank you amit ji,
Yes, we can safely assume it as B1 and B2, and clearly B2 is a much better business. If we assume that the Rs 500 that we are inputting in both the business is pure equity and no debt is taken, then in case of B1 ROE is 10% and in case of B2 ROE is 20%. Now to find the intrinsic value of both businesses, if in case of B1 as the required rate of return is 10% the value will be 500 (50/0.1) and for B2 we will have intrinsic value of 1000. But if we say that the visibility for this return is for next 10 year, then the valuation will become tricky.